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Summary

  • Share repo's have added significantly to EPS growth.
  • Hardware business went through tough period, now stabilizing.
  • Dividend growth is the real opportunity.

Oracle (NYSE:ORCL) reports their fiscal q4 '14 earnings after the bell on Thursday, June 19th, 2014.

Analyst consensus per Thomson Reuters is currently expecting earnings per share of $0.95 on revenue of $11.48 billion for expected year-over-year (y/y) growth of 9% and 5%, respectively.

Since the q3 '14 earnings report from March '14, the revenue estimate has slipped a little, but the consensus EPS estimate has remained at $0.95 the last three months.

ORCL's stock is up about 10.5%-11% this year, YTD, not including the dividend.

Given that this will be the fiscal q4 '14 report, consensus estimates for 2015 are currently expecting EPS and revenue growth for the coming fiscal year of 10% and 5% respectively, which are a little better than fiscal '14's 9% and 3% respectively, and assuming the q4 '14 consensus is met.

Hardware is anywhere from 13% to 15% of total revenues if you include support, and the segment had a tough time the last few years, but revenue has been starting to stabilize: just this year alone, i.e. the first three quarters, here is the y/y growth in hardware revenue:

q4 '14: 2% (est)

q3 '14: 8% (actual)

q2 '14: -3% (actual)

q1 '14: -14% (actual)

The other issue the last 4-6 quarters is the slow growth in organic license revenue growth, which has been mired in the low-to-mid-single-digit growth range.

One unambiguous positive for ORCL is the cash being spent to repurchase stock. Here is the y/y change in revenues, operating income, fully diluted shares outstanding and EPS.

year-over-year growth5/14 q4 (est)2/14 q311/13 q28/13 q15/13 q42/13 q311/12 q28/12 q112 q412 q312 q212 q1
Revenues ($'s ml's)5%4%2%2%0%-1%3%-2%1%3%2%12%
Operating Expenses
Operating Incomen/a31%22%30%21%1%12%7%5%11%12%40%
net interest exp (net)
non operating income
Income pre-tax
income tax expense
Net earnings
diluted share outstandingn/a-5%-6%-6%-5%-5%-5%-4%-3%-1%0%1%
F/D EPS9%5%30%11%6%5%-2%10%9%15%6%14%

* Source: internal spreadsheet. Note the y/y change in the "diluted shares outstanding" line

Since May of 2011, ORCL has retired almost 12% of their outstanding shares, taking fully diluted shares outstanding from 5.164 billion as of May, 2011 to 4.575 billion shares as of February, 2014.

ORCL's cash balance has steadily increased despite the share repo's, which means that long-term debt was issued. Since May of 2011, long-term debt has increased from $14.7 billion to $22.7 billion.

One thing that is a little worrisome is that ORCL is spending between 12% and 15% of the share repo to offset dilution as insiders sell, and common stock is issued.

Despite the Ellison haters, I think ORCL was the best-managed mega cap, or large cap growth technology company exiting the March 2000 peak.

I thought it was absolute genius that Larry Ellison hired Chuck Phillips away from Morgan Stanley, made him president, and then used Phillip's expertise and acumen of the software business to acquire software business that would fit with ORCL's long-term strategy at good acquisition levels.

ORCL's stock is just $4 away from the October 2000 peak price of $46.47.

The other mega-cap growth stocks that were symbolic of the late 1990s are nowhere close to those 1999, 2000 levels.

No question Cloud is the future for ORCL and the enterprise software giant is ready to launch a database product for the Cloud with the 12C.

I'm not a techie, I'm a finance geek, I can barely post a iPhone picture to my Facebook (NASDAQ:FB) page, but I wouldn't bet against ORCL (ever) over the short or long run time frames.

Valuation: Over the next 3 years, ORCL is expected to post mid single digit revenue growth of 4%-6%, and high single-digit EPS growth of 7%-9%.

Trading at 12(x) fiscal 2015's expected 9% EPS growth rate, ORCL is pretty fairly valued to slightly undervalued. Excluding the $16 bl in cash on the balance sheet ORCL is trading at 9(x) cash-flow (ex cash) and 12(x) free-cash-flow (ex cash) or what again is a pretty normal valuation.

The opportunity for investors is with ORCL's dividend with the current payout ratio at just 17%-20% and the annual dividend amounting to $0.48 per share, which is scheduled to increase.

Assuming 2016's current EPS consensus of $3.46 isn't out of line, and assuming that at some point ORCL's payout ratio rises to be in line with the rest of the S&P 500 at 30%-35%, then ORCL's dividend should double over time to $1-$1.15 per share.

Earnings growth and a rising dividend is a "good thing" as Martha would say.

Technically, we always look for low-risk opportunities to buy stocks and ORCL is no exception. We would buy a pullback to the 200-day moving average at $37.09. Under $38 would be compelling in our opinion.

In terms of intrinsic value, both our model and Morningstar's value ORCL in the high $30's, low $40's currently so the stock - absent a sudden acceleration in growth, looks pretty fairly valued.

The dividend is the one metric that jumps out at us as a reason to own the stock. ORCL, given its $187 billion market cap, could be in the early stages of transitioning from a growth company to a stable, consistent, high-single digit to mid-teens earnings grower, with a fat dividend to match.

The Cloud is an important transition for them, but the core database market and the improving Hardware business will help restore ORCL to the 12%-15% EPS growth range.

ORCL management has proven they can operate in any environment.

(click to enlarge)

Disclosure: The author is long ORCL, FB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.